Food for thought

Aussie producers: like lambs facing a lion

Loyalty. It is the lynchpin of all commercial success. One regular, loyal customer is more valuable to an entrepreneur than 10 new ones.

However, the danger is for brands is to believe in loyalty too much, and this is what I am afraid has been happening in Down Under.

Australia is a country with some of the highest retail penetration in the world. Last year, a government report revealed that that the supermarket sector alone accounted for 63% of the country’s A$130bn in food sales for 2010-11, with its big two chains accounting for 80% of that spending.

The chains, Coles and Woolworths, saw total food and liquor sales of A$61.4bn that year through around 2,300 supermarket outlets and a further 2,040 liquor outlets.

Impressive numbers you would say, figuring that they were based largely on the overall growth in the food and beverage processing industry there.

Except this was not really the case. In reality, the retailers had been increasingly pushing their lower-priced, private-label products and not the branded ones that they had been selling up until then.

At first, it was a trickle, but gradually the food makers began to hurt. Initially, there were murmurs that the retailers were growing too big and too fast; then there were noises about the private labels.

But all along, most voices in the industry had been saying that Australians would buy home-grown produce first; that Australians stay loyal to their own products. This was something I would hear each time I interviewed an industry figure there. They were confident that well-known brands, especially the local ones, would ride out this light shower.

But the shower was really a storm.

Within a just a couple of years, private-label food products represented about a quarter of all supermarket sales, in spite of an increase in cheap food imports that has seen these grow by up to 20% over the last year.

And then finally some industry associations began to make noise about the unfair situation that had been developing. This was after only a couple, like Heinz’s chief executive, had warned about this early on. That retailers were squeezing their margins, bullying suppliers, implementing penalties and negotiating to the last cent to make sure that they sourced nothing but the cheapest.

But the retailers shrugged off any objections against them. They promised internal investigations and helplines. Yes, a line whereby a supplier could call the retailer to complain about it. Their main contention was that the customer wanted the cheaper imports.

What’s more, they were right.

While travelling to Australia last year, I often posed this question to locals. Would they buy a local and well-known brand first or would they opt for a cheap import if they could? It wasn’t exactly a survey, but it did find a mixed and interesting response.

Most of the younger Australians said that they would opt for the cheap imports. My guess is that these guys were products of a new age, where jobs are few and the bills are many. It made sense for them to behave like that.

But still, there were some proud Aussies who said that they never would.

Most of this group said that they would never buy an import. That also made sense: most older Australians are relatively better off, having ridden decade after decade of economic growth.

But as Dan Gregory, strategist and head of the Impossible Institute told me, most Australians do not behave like they say they do. They will pay for a brand, he said, except they would never pay a premium: that might put them off the purchase altogether.

I find it impossible to believe that with all their riches, the Australian food and grocery industry did not get one market research team to figure this out. For too long, they kept hanging on to the loyalty curtain, sure in their belief that Aussies will stay Aussies when it comes to food.

Instead of innovating in their packaging, branding and even sourcing, they sat on their haunches, hoping that the situation would sort itself out.

Heck, I would even hold the industry guilty of not lobbying the retailers enough. And it’s an open secret why this was the case: they didn’t want to upset the Big Two.

They behaved like lambs in front of lions and promptly paid for it.

Last week, Australia's competition watchdog said it was deepening an investigation into whether Coles and Woolworths abused their dominant positions in the market after speaking confidentially to around 50 suppliers.

You know what that sounds like? Like the teacher who took a couple of students aside and asked them in secret to dob in the bullies.

The Australian food and beverage industry has only itself to blame for the position it’s now in with the two retailers. You don’t behave like a child in a man’s game.

Have your say: Do you agree with Ankush? Let us know in the comments below.

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